Trade and Inequality: From Theory to Estimation

Abstract

While neoclassical theory emphasizes the impact of trade on wage inequality between occupations and sectors, more recent theories of rm heterogeneity point to the impact of trade on wage dispersion within occupations and sectors. Using linked employer-employee data for Brazil, we show that much of overall wage inequality arises within sector-occupations and for workers with similar observable characteristics; this within component is driven by wage dispersion between fi rms; and wage dispersion between firms is related to rm employment size and trade participation. We then extend the heterogenous- rm model of trade and inequality from Helpman, Itskhoki, and Redding (2010) and estimate it with Brazilian data. We show that the estimated model provides a close approximation to the observed distribution of wages and employment. We use the estimated model to undertake counterfactuals, in which we nd sizable e ects of trade on wage inequality.